Meritor Acquisition and 2022 Financial Results
Table of Contents
Sales to international markets (excluding the U.S. and Canada), based on location of customers, were 41 percent of total net sales in 2022, compared with 44 percent of total net
sales in 2021. A more detailed discussion of sales by segment is presented in the "OPERATING SEGMENT RESULTS" section.
Cost of Sales
The types of expenses included in cost of sales are the following: parts and material consumption, including direct and indirect materials; salaries, wages and benefits;
depreciation on production equipment and facilities and amortization of technology intangibles; estimated costs of warranty programs and campaigns; production utilities;
production-related purchasing; warehousing, including receiving and inspection; freight costs; engineering support costs; repairs and maintenance; production and warehousing
facility property insurance; rent for production facilities; charges for the write-downs of inventories in Russia and other production overhead.
Gross Margin
Gross margin increased $1.0 billion and increased 0.2 points as a percentage of sales. The increase in gross margin and gross margin as a percentage of sales was mainly due to
favorable pricing and increased volumes, partially offset by higher material costs and increased compensation expenses. The provision for base warranties issued as a percentage
of sales, was 1.8 percent in 2022 and 2.1 percent in 2021.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $313 million, primarily due to higher consulting expenses driven by acquisitions, integration and the work towards the
separation of the filtration business, higher compensation costs and increased travel expenses, partially offset by lower variable compensation expenses. Overall, selling, general
and administrative expenses, as a percentage of sales, decreased to 9.6 percent in 2022 from 9.9 percent in 2021. The decrease in selling, general and administrative expenses as
a percentage of sales was due mainly to net sales increasing at a faster rate than the increase in selling, general and administrative expenses.
Research, Development and Engineering Expenses
Research, development and engineering expenses increased $188 million, principally due to higher compensation costs, increased spending on prototypes, testing and supplies
and higher consulting expenses, partially offset by lower variable compensation expenses. Overall, research, development and engineering expenses, as a percentage of sales,
increased to 4.6 percent in 2022 from 4.5 percent in 2021.
Research activities continue to focus on development of new products to meet future emission standards around the world, improvements in fuel economy performance of diesel
and natural gas powered engines and related components as well as development activities around battery electric, fuel cell electric and hydrogen engine solutions.
Equity, Royalty and Interest Income From Investees
Equity, royalty and interest income from investees decreased $157 million, mainly due to lower earnings at Beijing Foton Cummins Engine Co., Ltd. and Dongfeng Cummins
Engine Co., Ltd., the $28 million impairment of our investment in our Russian joint venture with KAMAZ and the February 7, 2022, purchase of Westport Fuel System Inc.'s
stake in Westport JV. See NOTE 2, "ACQUISITIONS," and NOTE 23, "RUSSIAN OPERATIONS," to our Consolidated Financial Statements for additional information.
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